The Moody’s/REAL CPPI data series is produced by the MIT/CRE but is noted to be “complimentary” to their alternative transaction based index (TBI) as it is published monthly and is formulated from a completely different dataset supplied by Real Capital Analytics, Inc.

The latest results reflecting national data for all property types settled through August strongly suggest that prices for commercial real estate have eroded significantly.

This post is a follow up and further elaboration showing the current and historical values for some key interest rates.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to “raise needed cash for current transactions”.

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve’s target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has expanded dramatically to 438 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble with the spread now standing at a 472 basis points.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 75 basis points.

These three indicators should disclose a clear picture of the overall sense of confidence (or lack thereof) on the part of consumers, businesses and investors as the current recessionary period develops.

Today’s final release of the Reuters/University of Michigan Survey of Consumers for October showed a record plunge to consumer sentiment with a reading of 57.6 and dropping 28.8% below the level seen in October 2007.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) also declined notably to 57 remaining 18.69% below the result seen in October 2007.

As for the current circumstances, the Current Economic Conditions Index collapsed to its lowest level seen since at least 30 years to a record low of 58.4 or 40.16% below the result seen in October 2007.

As you can see from the chart below (click for larger), the consumer sentiment data is a pretty good indicator of recessions leaving the recent declines possibly predicting rough times ahead.

The latest quarterly results (Q3 2008) of The Conference Board’s CEO Confidence Index increased marginally to a value of 40, nearly the lowest readings since the recessionary period of the dot-com bust.

It’s important to note that the current value has fallen to a level that would be completely consistent with economic contraction suggesting the economy is either in recession or very near.

The October release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors declined a whopping 24.3% since September while European confidence declined 1.5% and Asian investor confidence declined 0.6% all resulting in a decrease of 17.5% to the aggregate Global Investor Confidence Index which now rests 29.02% below the result seen last year.

Given that that the confidence indices purport to “measure investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors”, it’s interesting to consider the performance surrounding the 2001 recession and reflect on the performance seen more recently.

During the dot-com unwinding it appears that institutional investor confidence was largely unaffected even as the major market indices eroded substantially (DJI -37.9%, S&P 500 -48.2%, Nasdaq -78%).

But today, in the face of the tremendous headwinds coming from the housing decline and the mortgage-credit debacle, it appears that institutional investors are less stalwart.Since August 2007, investor confidence has declined significantly led primarily by a material drop-off in the confidence of investors in North America.

Thursday, October 30, 2008

The proposed FDIC homeowner bailout initiative has been reported to have an objective of reducing monthly payments for delinquent borrowers to a level that they can afford… Won’t this simply encourage others to become delinquents?

Why spend 50% of your take home income on the mortgage when, with the government’s help, you can spend just 30%?

Looking at the report more closely though, the top-line GDP result would have been much weaker had it not been for a surprise and truly unusual 18.1% surge in national defense spending that, combined with a healthy increases in other federal, state and local government spending, added over 1% of growth.

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past recessionary episodes and that this signal is now so strong and sustained that a contraction in the economy is fundamentally certain.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

So, looking at the post-“dot com” recession period we can see the telltale signs of a potential “mid-cycle” slowdown and if we were to simply reflect on the history of employment as an indicator of the health and potential outlook for the wider economy, it would not be irrational to conclude that times may be brighter in the very near future.

But, adding a little more data I think shows that we may in fact be experiencing a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and single family building permits since 1967.

One notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

The July results reveal a marked slowing of price appreciation across all classes of commercial real estate with the aggregate index registering its first annual decline in at least the 15 years the data has been tracked.

It’s important to keep in mind that this decline is coming from data that was settled well in advance of the historic stock market and wider macroeconomic crisis which, in all likeliness, will result in significant additional downward pressure on commercial real estate prices.

Clearly, commercial real estate, having already matched and surpassed the level of decline seen after the dot-com bust, now sit poised on the verge of an unprecedented slump.

The charts below show the National index and the component indices since 1994 (click for larger).

The S&P/Case-Shiller (CSI) Home Price index together with the Radar Logic (RPX) for Boston represent the most accurate indicators of the true price movement for both single family homes and the entire residential real estate market as a whole (singles, multi and condos).

For August, both the CSI and RPX showed continued weakness with the CSI declining 4.74% on a year-over-year basis while the RPX dropped 8.56% over the same period.

It’s important to note that both measures are derived from sales data transacted in August which generally includes properties that under agreement in June and July, well in advance of the historic stock market and wider macroeconomic declines.

In all likelihood the dramatic declines to consumer confidence and increases in unemployment will work to place significant downward pressure on home prices.

As you can see from the chart below (click for larger), although the RPX captures a greater degree of seasonality, both series are very strongly correlated.

Also, note that the although the RPX initially gave a strong indication that this year’s seasonal uptick in prices had abated with the July release, the August release brought a boost in prices and continued the pattern that is more or less typical when compared to the last three years.

To better illustrate the drop-off in home prices and the potential length and depth of the current housing decline, I have compared BOTH the normalized price movement, annual and peak percentage changes to the Boston CSI home price index from the 80s-90s housing bust to today’s bust (ultra-hat tip to the great Massachusetts Housing Blog for the concept).

The “normalized” chart compares the normalized Boston price index from the peak of the 80s-90s bust to the peak of today’s bust.

Notice that during the 80s-90s bust prices took roughly 46 months (3.8 years) to bottom out.The “annual” chart compares the percentage change, on a year-over-year basis, to the Boston CSI from the last positive value through the decline to the first positive value at the end of the decline.

In this way, this chart captures only the months that showed monthly “annual declines”.The “peak” chart compares the percentage change, comparing monthly Boston index values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 105 months (almost 9 years) peak to peak including 34 months of annual price declines during the heart of the downturn.

The final chart shows that the Boston housing market has been, in a sense, declining steadily since early 2001 when annual home price appreciation peaked and the intensity of the housing expansion began to wane (click on following chart for larger version).

It appears that that the main thrust of the housing expansion occurred “in-line” with the wider economic expansion that was fueled primarily by the dot-com bubble and that since the dot-com bust, the housing market has never been quite the same.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage declined 2 basis points since last week to 6.26% while the purchase application volume increased 8.5% and the refinance application volume jumped 28.5% compared to last week’s results.

It’s important to note that, in the wake of the conservatorship of Fannie Mae and Freddie Mac, the average interest rate on an 80% LTV 30 year fixed rate loan initially dropped significantly but more recently has remained within the range seen throughout 2007.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

Tuesday, October 28, 2008

Today’s release of the S&P/Case-Shiller home price indices for August continues to reflect the extraordinary weakness seen in the nation’s housing markets with ALL of the 20 metro areas tracked reporting year-over-year declines and ALL metro areas showing substantial declines from their respective peaks.

Further, there continues to be a notable re-acceleration of the price slide with the 10-city index dropping 1.10% and the 20-city index dropping 1.03% just since last month.

Also, it’s important to keep in mind that today’s release was compiled using home sales data primarily from July and August, well in advance of the historic levels of financial collapse seen in September and October.

In all likelihood, today’s report sits on the threshold of a new and even more momentous wave of home price declines as the continued economic crisis and dramatically accelerating unemployment work to both crush consumer sentiment and force panicked mortgage lenders to continue to tighten their lending standards.

As the housing decline goes “Up-Prime” a larger and much more damaging population of homeowners will face historic levels of financial stress the outcome of which is, at the moment, very hard to calculate.

The 10-city composite index declined a record 17.72% as compared to August 2007 far surpassing the all prior year-over-year decline records firmly placing the current decline in uncharted territory in terms of relative intensity.

Topping the list of regional peak decliners were Phoenix at -36.32%, Las Vegas at -35.89%, Miami at -34.67%, San Diego at -32.80%, Los Angeles at -30.94%, San Francisco at -30.66%, Detroit at -27.24%, Tampa at -26.79%, Washington DC at -22.39%, Minneapolis at -17.05%, Chicago at -11.31%, Boston at -10.80% and New York at -10.65%.

Additionally, both of the broad composite indices showed significant declines slumping -21.96% for the 10-city national index and 20.31% for the 20-city national index on a peak comparison basis.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

Looking at the actual index values normalized and compared from the respective peaks, you can see that we are still likely less than half of the way through the portion of the decline in which will be seen fairly significant annual declines (click the following chart for larger version).

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 97 months (over 8 years) peak to peak including roughly 43 months of annual price declines during the heart of the downturn.

Notice that peak declines have been FAR more significant to date and, keeping in mind that our current run-up was many times more magnificent than the 80s-90s run-up, it is not inconceivable that current decline will run deeper and last longer.

As was noted last month, with September comes continued seasonal deceleration in single family home sales that will generally continue slumping through the Fall before reaching a low in seasonal sales next February.

With this drop-off will come additional pricing pressure as sellers compete for the scanty remains of the 2008 selling season.

Additionally, although September showed a much heralded 5.0% year-over-year increase of single family home sales, it’s important to remember that last September was the first month to feel slackening sales as a result of the abrupt collapse of the private Jumbo loan market.

With the report the Massachusetts Realtor leader Susan Renfrew continues her spin even in the face of a truly historic economic collapse.

“Despite all the financial turmoil of the past weeks and months, it continues to be a very good time to buy for qualified first-time homebuyers. In addition to the reduced prices and still-favorable interest rates, programs such as first-time homebuyer tax credit, increased FHA loan limits and affordable loan products from MassHousing are easily accessible,”

This month very clearly exposed an interesting trick that both the Massachusetts Realtors and National Realtors use when reporting the numbers… The month-to-month sales in MA showed a significant 18.8% decline while the year-over-year showed a 5.0% increase…. Which number do you think the Realtors touted to the media?

Of course, when the numbers are reversed (higher monthly change and lower annual) they will use the month-to-month numbers.

MAR reports that in September, single family home sales increased 5.0% as compared to September 2007 with a 12.0% decline in inventory translating to 10.0 months of supply and a median selling price decline of 13.2% while condo sales dropped 6.2% with a 17.2% decline in inventory translating to 10.6 months of supply and a median selling price decrease of 7.3%.

The S&P/Case-Shiller Home Price Index for Boston, which is the most accurate indicator will be released tomorrow so stay tuned as I will create a separate post for Boston that will outline the current price decline.

It’s important to keep in mind that this stunning year-over-year decline is coming on the back of the significant declines seen in 2006 and 2007 further indicating the enormity of the housing bust and clearly dispelling any notion of a bottom being reached.

Additionally, although inventories of unsold homes have been dropping for well over a year, the sales volume has been declining so significantly that the sales pace now stands at an astonishing 10.4 months of supply.

The following charts show the extent of sales declines seen since 2005 as well as illustrating how the further declines in 2008 are coming on top of the 2006 and 2007 results (click for larger versions)

Look at the following summary of today’s report:

National

The median sales price for a new home declined 9.11% as compared to September 2007.

New home sales were down 33.1% as compared to September 2007.

The inventory of new homes for sale declined 25.4% as compared to September 2007.

The number of months’ supply of the new homes has increased 10.6% as compared to September 2007 and now stands at 10.4 months.

Regional

In the Northeast, new home sales were down 65.1% as compared to September 2007.

In the Midwest, new home sales were down 37.5% as compared to September 2007.

In the South, new home sales were down 23.8% as compared to September 2007.

In the West, new home sales were down 37.9% as compared to September 2007.